OBB v. Sachs is scheduled for oral argument in the United States Supreme Court on October 5, 2015. During the period leading up to oral argument, I intend to publish a series of posts regarding issues in the Sachs case. My general view is that Sachs is an easy case to resolve under Saudi Arabia v. Nelson, 507 U.S. 349 (1993), but that there is potential for a major mistake by the Supreme Court on the critical issue of attribution. I will provide more information on these key points in the upcoming weeks.

Today, I want to focus on an issue that I have discussed before, namely OBB’s argument that the determination of whether an entity is an “agent” of a foreign state should be resolved through the definition of “agency or instrumentality” set forth in 28 U.S.C. section 1603(b). I will not revisit the points I made in previous posts (here and here). I do, however, want to add three points:

(1) OBB did not raise its argument that section 1603(b) controls the inquiry of whether an entity is an “agent” of a foreign state during district court proceedings. OBB also did not raise the argument in its main briefing before the Ninth Circuit Court of Appeals. Instead, OBB raised the issue for the first time during oral argument on en banc rehearing, and was subsequently ordered by the Ninth Circuit to submit supplemental briefing addressing its new argument. SeeSachs v. Republic of Austria, 737 F.3d 584, 594 n. 7 (9th Cir. 2013) (en banc). OBB’s novel argument – which was contrary to FSIA precedent – was thereafter squarely rejected by the Ninth Circuit.Sachs, 737 F.3d at 594-98. That OBB itself did not see fit to raise the issue until oral argument on en banc rehearing fails to inspire confidence, and a closer look shows why OBB’s novel interpretation of the FSIA should have remained on the cutting room floor.

(a) A “foreign state”, except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An “agency or instrumentality of a foreign state” means any entity—

. . .

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof

. . . .

28 U.S.C. § 1603(a), (b)(2). For OBB’s argument to work, the term “foreign state” in section 1603(b) must include “agencies or instrumentalities” of foreign states; otherwise, under OBB’s framework, an “agency or instrumentality” of a foreign state could never be held to have an “agent.” Yet, as applied to OBB’s situation (that is, the question of whether an entity is an agent of an agency or instrumentality), OBB’s interpretation would effectively yield a statute that states the following:

(b) An “agency or instrumentality of [an agency or instrumentality of] a foreign state” means any entity—

. . .

(2) which is an organ of [an agency or instrumentality of] a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by [an agency or instrumentality of] a foreign state or political subdivision thereof

. . . .

Such a reading of section 1603(b) is not only deeply confusing, but it is also inconsonant with the statute’s use of the term “political subdivision thereof” (since agencies or instrumentalities of a foreign state do not have “political subdivisions”). In other words, when section 1603(b) used the term “foreign state,” it was referring to foreign states proper – such as the Republic of Austria – and not to agencies or instrumentalities of a foreign state. That is, in fact, exactly what the FSIA’s legislative history demonstrates. See H.R. Rep. No. 94-1487, at 15 (1976) (stating that an agency or instrumentality must “be either an organ of a foreign state (or of a foreign state’s political subdivision), or that a majority of the entity’s shares or other ownership interest be owned by a foreign state (or by a foreign state’s political subdivision)”). It is also what the Supreme Court concluded in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), when the Court held “that only direct ownership of a majority of shares by the foreign state satisfies the statutory requirement [set forth in section 1603(b)(2)].” Id. at 474 (emphasis added).

There is, in short, no statutory support for OBB’s approach. Nothing in the FSIA indicates that a court first needs to examine section 1603(b) to determine whether the defendant (like OBB) is an agency or instrumentality of a foreign state, and then re-examine section 1603(b) to determine whether the putative agent is an “agency or instrumentality” of the “agency or instrumentality.” No court has ever adopted that type of circular analysis under section 1603, and for good reason: it makes no sense.

(3) OBB’s agency or instrumentality argument fails for another reason: it would render far too many entities incapable of being deemed an “agent” of a foreign state, and thereby deeply undermine the FSIA’s commercial activity exception.

Consider the following scenario: through individual intermediaries, a foreign state creates a separate corporation in New York State. The foreign state exercises extensive day-to-day control over the corporation, which engages in a series of commercial transactions in the United States. After the corporation’s conduct leads to multi-million dollar losses for a number of United States citizens, the individuals damaged file suit against the corporation and the foreign state. Their main jurisdictional argument under the FSIA is that the corporation was an agent of the foreign state through the latter’s exercise of day-to-day control, and that the corporation’s conduct is attributable to the foreign state for jurisdictional purposes.

Under OBB’s (mis)interpretation of section 1603(b), the plaintiffs in this scenario could not proceed against the foreign state itself because the corporation does not meet the definition of an agency or instrumentality under the FSIA. The corporation was created in New York, not in the foreign state, and therefore could never (under OBB’s theory) be an agent of a foreign state. See 28 U.S.C. § 1603(b)(3) (stating that an “agency or instrumentality of a foreign state” means any entity which, inter alia, “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country”). The same would hold true if the foreign state created the entity under the law of a third country, such as the law of the Bahamas or Panama. In fact, OBB’s formulation would provide a blueprint to foreign states about how to engage in commercial activity in the United States without risking the possibility of litigation: if the foreign state engages in commercial activity through a corporation created under the law of the United States or a third country, it will never be held to engage in commercial activity in the United States — even if the foreign state exercises day-to-day control over the corporation created, and effectively engages in extensive commercial activity in the United States through the nominally separate corporation.

OBB’s position, in other words, would profoundly undermine the effectiveness of the FSIA’s commercial activity exception. Where a foreign state dominates a separate corporation to such an extent that a principal-agent relationship is created, courts must be permitted to attribute the corporation’s conduct to the foreign state for jurisdictional purposes. Otherwise, the first clause of the commercial activity exception would contain a loophole that would swallow the exception itself.

[Next week, I will examine Sachs’s argument that OBB’s “overall commercial railway enterprise” satisfies the “commercial activity” requirement under the first clause of the FSIA’s commercial activity exception.]

In FSIA cases, plaintiffs and their counsel frequently fail to examine carefully at the outset of the litigation a foreign state entity’s status under section 1603. That mistake, which is easily avoidable, has resulted in numerous instances of defective service of process and other unnecessary delays in FSIA litigation.

In Howe v. Embassy of Italy, No. CV 13-1273 (BAH), 2014 WL 4449697 (D.D.C. Sept. 11, 2014), the court recently held that the Italian Embassy was a foreign state for purposes of the FSIA’s service provisions. The court relied on the “categorical” approach adopted by the D.C. Circuit in Transaero, Inc. v. La Fuerza Aerea Boliviana, 30 F.3d 148 (D.C. Cir. 1994), which examines if an entity is “an integral part of a foreign state’s political structure” in determining whether the entity qualifies as a “foreign state.” Howe, 2014 WL 4449697, at *5-6; see also Transaero, 30 F.3d at 151. The Howe court also relied on a line of FSIA cases that have determined that an embassy is part of the foreign state itself. See Howe, 2014 WL 4449697, at *6; see alsoBarot v. Embassy of Republic of Zam., No. 13-451, 2014 WL 1400849, at *4 (D.D.C. Apr. 11, 2014) (holding defendant foreign embassy in Washington, D.C., is “foreign state or [a] political subdivision of a foreign state” for FSIA purposes (alteration in original)); Ellenbogen v. The Can. Embassy, No. 05-1553, 2005 WL 3211428, at *2 (D.D.C. Nov. 9, 2005) (“[I]t is well-settled that an embassy is a ‘foreign state’ . . . not an ‘agency or instrumentality’ thereof”); Int’l Rd. Fed’n v. Embassy of Dem. Republic of the Congo, 131 F. Supp. 2d 248, 250 (D.D.C. 2001) (holding embassy of foreign state in Washington, D.C., a “foreign state” for the purposes of the FSIA and collecting cases); Underwood v. United Republic of Tanz., No. 94-902, 1995 WL 46383, at *2 (D.D.C. Jan. 27, 1995) (“Applying the categorical approach to the status of the Embassy, we conclude that as a matter of law an embassy of a sovereign nation is a foreign state which must be served pursuant to § 1608(a).”). Based upon this conclusion regarding the Italian Embassy’s status, the Howe court held that the plaintiff’s attempted service – which did not meet the requirements of section 1608(a) – was defective. Howe, 2014 WL 4449697, at *6.

It is not always easy to tell whether an entity is a foreign state or an agency or instrumentality thereof. While each entity must be analyzed separately in the context of the foreign political system at issue, a good rule of thumb is that ministries or departments, the military, and embassies will be deemed “foreign states” – and not agencies or instrumentalities thereof – under 28 U.S.C. § 1603(a). See, e.g., Garb v. Republic of Poland, 440 F.3d 579, 597-98 (2d Cir. 2006) (holding that the Ministry of the Treasury of Poland is a foreign state and not an “agency or instrumentality” thereof); Transaero, 30 F.3d at 153 (“We hold that armed forces are as a rule so closely bound up with the structure of the state that they must in all cases be considered as the ‘foreign state’ itself, rather than a separate ‘agency or instrumentality’ of the state.”); Howe, 2014 WL 4449697, at *5-6 (holding that an embassy is a foreign state under section 1603(a)).

In any event, plaintiffs and their counsel would be well-served to examine the issue carefully at the outset of the case. An entity’s status can have a major impact on the ensuing litigation, including with respect to service (28 U.S.C. § 1608), jurisdiction (28 U.S.C. § 1605(a)(3)), damages (28 U.S.C. § 1606), and attachment or execution (28 U.S.C. § 1610). An early resolution of the issue should not be difficult – Transaero is the key case to get the research started – and can avoid costly and unnecessary litigation.

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Alexis Haller is a trial and appellate attorney with over thirteen years of FSIA litigation experience. Mr. Haller has achieved dismissals in numerous FSIA actions, and has successfully represented a foreign head of state and foreign diplomatic agents.
Mr. Haller graduated from Princeton University summa cum laude in 1995 and obtained his juris doctor degree from Stanford Law School in 1998. He is a member of the bars of the District of Columbia and California, and is admitted to practice before the United States Supreme Court and various United States courts of appeals.